The Government had to use £45 billion of taxpayer money to bail out the bank, after it ran into difficulties in 2008.

The Cabinet Office said: "Both the Financial Services Authority and the Treasury Select Committee have investigated the reasons for this failure and its consequences.

"They are clear that the failure of RBS played an important role in the financial crisis of 2008-9 which, together with other macroeconomic factors, triggered the worst recession in the UK since the Second World War and imposed significant direct costs on British taxpayers and businesses.

"Fred Goodwin was the dominant decision maker at RBS at the time."

The Forfeiture Committee, which made the decision, is chaired by Sir Bob Kerslake, head of the civil service.

"The scale and severity of the impact of his actions as CEO of RBS made this an exceptional case," it said.

The Honours Forfeiture Committee has stripped Fred Goodwin of his knighthood [Photo: PA]

Political pressure has been mounting for the title awarded by Labour to Sir Fred in 2004 for "services to banking" to be withdrawn over his role in the subsequent collapse of RBS.

A spokesman for business lobbying group the CBI said: "The business community will understand the Queen's decision to take away the knighthood awarded to Fred Goodwin for services to banking in 2004. Such an annulment is exceptional but unsurprising, given all of the circumstances."

The campaign to strip him of his knighthood gained fresh momentum earlier this week after a member of the independent panel overseeing last year's inquiry in the collapse of Royal Bank of Scotland judged that the report amounted to a regulatory "censure" of the former RBS chief executive.

Under the honours system, recipients can be made to hand back an award if they are "censured by the relevant regulatory authority for actions which are directly relevant to the granting of an honour", the Honours Forfeiture Committee rules state.

Sir Fred became the symbol of the banking sector's ills after leading RBS to a near-collapse that required a £45bn taxpayer bail-out, and then demanding his contractual entitlement to an £8m pension top-up. Facing furious public criticism, he later gave back a portion of his entitlement.

A number of cross-party MPs had called for Sir Fred's knighthood to be removed, including Labour leader Ed Miliband.

David Fleming, Unite national officer said: "It is a token gesture to strip Fred Goodwin of his knighthood, but one which will be well received by the thousands of workers who lost their jobs during his rule.

"Nonetheless this will do nothing to bring job security to the staff across the banking sector who continue to work under a culture of excess and greed at the top. Action from the Government is needed in banking reform, not simply empty rhetoric on knighthoods or shareholder activism."

The Queen has the sole authority to rescind a knighthood, after taking advice.

RBS declined to comment on the decision to annul Mr Goodwin's knighthood.